The charts that matter: the bond bubble keeps getting bigger

Markets are still absorbing the impact of the Federal Reserve’s shift closer to cutting rates that we saw last week. John Stepek looks at what's happening to the charts that matter the most to the global economy.

Hold the front page! Before we get started on anything this morning, I wanted to let you know that you can now get your tickets to the MoneyWeek Wealth Summit.

As those of you who signed up for the early bird email notification (gold star for you lot!) will already know, on 22 November, MoneyWeek is hosting a positive investment extravaganza. Not only will all of your favourite MoneyWeek writers be there Merryn, of course, David Stevenson, Dominic Frisby, some guy called John Stepek but we're also putting together an absolutely stellar line-up of guests.

We've already got longevity investor and entrepreneur Jim Mellon; James Anderson of Scottish Mortgage Trust fame; and financial historian, author and MoneyWeek favourite Russell Napier speaking. And we are talking to many more big names, including one person that I'm particularly excited about who I was literally just discussing with Merryn five minutes before writing this but I can't tell you any more on that right now, just in case.

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Oh, and because I know how the practicalities can sometimes be a hassle at these events, I'll tell you up front you get breakfast, lunch, and the chance to network with our writers at post-event drinks afterwards. So not only will you get the chance to absorb up-to-the-minute insight and ideas from the experts on the best investment opportunities and how to plan around today's political turmoil, but you'll also be well-fed and watered throughout the day.

In short, this is shaping up to be our best event yet. I suggest you book now you get an early bird discount (and you can get extra off if you're a MoneyWeek subscriber). Here's where to get your tickets.

Phew. And after that exciting news, some more exciting news we have a new podcast this week! Merryn and I discuss gold, debt jubilees student debt looks like the first to be written off, but wouldn't it be fairer to give everyone £50,000? and negative-yielding government debt. Listen to it here.

Also, I made a guest appearance on our sister magazine The Week's podcast this week. There I tried to explain what negative yields are and why they matter. I'm not sure I achieved that but we also had a nice chat about David Epstein's new book, Range, and debated the over-medicalisation of mental health. You can listen to that one here.

If you missed any of this week's Money Mornings, here are the links you need:

Monday: The bond bubble is back and bigger than ever before

Tuesday: First Woodford, now H2O how worried should you be about liquidity?

Wednesday: Gold is back in the game so what's our next price target?

Thursday: Why "America First" is bad news for the US dollar

Friday: Private equity's "wall of money" is back at pre-financial crisis levels

Currency Corner: It's time to sell the US dollar here's why

Subscribe: Get your first six issues of MoneyWeek free here

Don't miss Merryn's blog on how the fallout from the shuttering of Neil Woodford's fund is already having a seismic impact across the fund management industry.

Oh and if you're looking for some summer reading on investment, check out my book, The Sceptical Investor.

Now, to the charts.

Markets are still absorbing the impact of the Federal Reserve's shift closer to cutting rates that we saw last week. So how has that affected the yield curve?

The chart below shows the difference (the "spread") between what it costs the US government to borrow money over ten years and what it costs over two. Once this number turns negative, the yield curve has inverted, which almost always signals a recession (although perhaps not for up to two years).

The curve between the three month and the ten year is still inverted. But the two-year and ten-year is not. So far, this implies that investors are at least hopeful that the Fed might loosen enough to prevent a downturn. We'll see.


(The gap between the yield on the ten-year US Treasury and that on the two-year, going back three months)

Gold (measured in dollar terms) continued to build on last week's "breakout". Dominic explained what's going on earlier in the week.


(Gold: three months)

The US dollar index a measure of the strength of the dollar against a basket of the currencies of its major trading partners fell hard this week, mainly due to the shift in expectations of the Fed. In turn, that's a big part of the reason that gold and other commodities had a pretty decent time of it this week. Will dollar weakness last? I think the longer-term picture and the political fundamentals aren't great; while Dominic reckons that anyone who looks at trends should also be short the US dollar right now.


(DXY: three months)

Meanwhile, helped by the weakening dollar, the number of yuan (or renminbi) to the US dollar (USDCNY) slipped away from the critical 7.0 level that would suggest China might be on the verge of devaluing its currency, which in turn could spark deflation across the globe.


(Chinese yuan to the US dollar: three months)

Ten-year yields on major developed-market bonds are still heavily negative (apart from the US), although they haven't fallen any further this week. For more on how daft, this is, listen to both of the podcasts above.


(Ten-year US Treasury yield: three months)


(Ten-year Japanese government bond yield: three months)


(Ten-year bund yield: three months)

Copper remained roughly where it was at this time last week.


(Copper: three months)

The Aussie dollar made a decent recovery this week and is now threatening to rise back above the 0.7 mark that had proved to be a pretty solid floor for the currency against the US dollar for a while.


(Aussie dollar vs US dollar exchange rate: three months)

Cryptocurrency bitcoin had quite the week. At the same time as everyone was getting excited about gold's breakout, the original digital currency rocketed almost to the $14,000 mark. Bear in mind that many people had written bitcoin off after its extraordinary late 2017 high, followed by the crash and grind lower in 2018. Hopes were certainly reignited this week, although anyone coming late to the party took a nasty fall at the end of the week (ironically if you define a bear market as a 20% drop from the most recent high, then bitcoin managed to fall into a bear market this week, while also hitting its highest point in the current bull run).


(Bitcoin: ten days)

About two months ago, US jobless claims hit a fresh low on the four-week moving average measure, dropping to 201,500. Why do you care? Because US stocks typically don't peak until after this four-week moving average has hit a low for the cycle, and a recession tends to follow about a year later (always remembering that this is a tiny sample size).

This week, the moving average rose to 221,250, while weekly claims came in quite a bit higher than expected at 227,000.


(US jobless claims, four-week moving average: since January 2016)

The oil price (as measured by Brent crude, the international/European benchmark) moved higher, again driven by the weakening US dollar and tensions with Iran.


(Brent crude oil: three months)

Internet giant Amazon was broadly flat after last week's big rally...


(Amazon: three months)

as was electric car group Tesla.


(Tesla: three months)

That's all for this week. But remember don't put off buying your tickets for the MoneyWeek Wealth Summit make sure you secure your seat now.

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.